Rates set to remain unchanged

11:14, 12 January 2011

ByManchester Evening News

The Bank of England is expected to leave interest rates untouched on Thursday despite fears over surging inflation and commodity prices. The feeble nature of the economic recovery means the Bank is unlikely to raise its base rate from its all-time low of 0.5 per cent this week.

The Bank of England is expected to leave interest rates untouched on Thursday despite fears over surging inflation and commodity prices.

The feeble nature of the economic recovery means the Bank is unlikely to raise its base rate from its all-time low of 0.5 per cent this week.

The Consumer Price Index (CPI) measure of inflation rose to 3.3 per cent in November, driven by the rising cost of oil, clothes and food, and the Bank admits it could rise as high as 4 per cent by the spring.

But the Bank's policy setters, who are tasked with keeping CPI at 2 per cent, would rather brave above-target inflation than risk tipping the economy back into a "double-dip recession", said economists.

A further round of quantitative easing, or money printing, is also not expected because this would further add to inflationary pressures.

Howard Archer, chief economist at IHS Global Insight, said: "The Bank's Monetary Policy Committee are now in a very difficult position.

"Although the UK market achieved very decent growth in the second and third quarters it is still in a very fragile state following the deep recession.

"We suspect most committee members will be reluctant to adjust policy until they get a clear idea of how the economy is reacting to fiscal policy being tightened from the start of 2011."

The recovery appears to have faltered in December, hindered by the Arctic weather.

Markit/CIPS data showed that the construction sector fell further into decline in December, while the powerhouse services sector contracted marginally for the first time in 20 months, leaving only the manufacturing sector in growth.

Markit economists downgraded their expectations for the UK's GDP growth in the fourth quarter from 0.5 per vent to 0.4 per cent following the announcements.

GDP figures for the second and third quarters were also revised down from 1.2 per cent to 1.1 per cent and from 0.8 per cent to 0.7 per cent respectively, adding to fears over the strength of the recovery.

Putting up interest rates may help reduce inflation but it would also reduce the spending power of homeowners with tracker mortgages and people repaying other debts and further endanger the recovery.

The Bank also believes that most of the inflationary pressures are temporary and should fall back in a year's time.

But that will be little comfort to consumers whose pay packets are not keeping up with inflation.

There has been a barrage of bad news for cash-strapped consumers in recent weeks as petrol, gas and clothes all rose in price, and last week's VAT rise from 17.5 per cent to 20 per cent pushed up the cost of most goods and services.

Economists disagree on when interest rates, which have been at their current level since March 2009, will rise.

Vicky Redwood, UK economist at Capital Economics, said interest rates were unlikely to be changed until 2013.

Howard Archer, and Malcolm Barr of JP Morgan Chase, do not expect interest rates to rise until late 2011.

However, last month the CBI warned that rates would start to rise by the spring and the base rate would hit 2.75 per cent by the final quarter of 2012.

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